A lot of people enter retirement having heard various colloquial “wisdoms” throughout the years, but not all of them are necessarily accurate. Understanding how these misconceptions may have a negative impact on your retirement expectations can help you know how to correct–or better yet, avoid–costly mistakes.
After all, you’ve worked hard to build a financial plan that can fulfill your retirement dreams, and you want to get the most from your savings. Have you accounted for all these myths and mistakes in your retirement plan?
Retirement Planning Myths
1. Health Care Costs Are Covered by Medicare
Studies have shown that for a healthy 65-year-old couple retiring in 2021, total health care expenses throughout their retirement will average $662,156. These expenditures include Medicare premiums, deductibles and copayments for prescription drugs. On top of that, you may expect, on average, two years of long-term care, which could add up to more than $200,000 per individual, depending on the type of care needed.
2. My Taxes Will Be Reduced in Retirement
It is important to manage your total amount of adjusted gross income (AGI) while in retirement. Your AGI determines what tax bracket you are placed in, whether you will be required to pay taxes on your Social Security benefits ;and how much you’ll pay for Medicare premiums. With a lower AGI, you can keep a greater portion of your retirement income for yourself. In some cases, you may retain more money by having less income.
3. Life Insurance Cash Benefits Will Not Add to My Retirement Fund
Did you know that your heirs will not receive any of the cash benefits accumulated in your life insurance policy? If your policy includes a cash value, you can use that cash in retirement. And you won’t owe any taxes if you take less than your accumulated premiums.
4. All Debt Is Bad Debt
Common sense tells you that less debt means more available income in retirement. But debt isn’t necessarily bad. For example, your home mortgage may carry a much lower interest rate than credit cards or other types of debt.
That being said, if you’d like to lower your debt burden during retirement, downsizing your mortgage might be a good option. You can sell your current home and purchase a more affordable one using the equity from the sale towards the purchase. You’ll finance a smaller amount, which gives you more affordable monthly mortgage payments.
Another option is to finance most or all of your new home and invest the proceeds from the sale into other investment vehicles that have the potential to earn a higher rate of return than the rate you’ll pay on the new mortgage. Keep in mind that selling your home may come with tax obligations, so work with someone who understands your state and local tax circumstances.
Retirement Planning Mistakes
1. Failing to Set Expectations with Loved Ones
Are you planning to put your children through college and maybe even help pay for your grandchildren’s education? Or maybe you intend to pay for weddings. How will inflation five years into your retirement impact these costs? Have you planned sufficiently for funeral expenses?
It’s important to review with your family what expectations they may have about your help with these emotion-driven expenses once you’re on a fixed income. Planning for a successful, enjoyable retirement means avoiding false expectations.
2. Saving Aggressively So You Can Retire Early
When you think about early retirement, consider this: money x time = retirement. The longer you pay into your retirement fund, the more money you can expect to have when you’re ready to retire. Early retirement can cost you money in savings, but also in other retirement benefits. Some of these benefits include health insurance, reduced Social Security and pension dollars and even an increase in taxes. Early retirement may equal less dollars to spend in retirement years.
3. Assuming Too Much, Accounting for Too Little
Think of all the daily and monthly expenses that will disappear as soon as you retire. No more costly commutes. There’s no need for a closet full of expensive suits and shoes since you aren’t dressing to impress anymore. The cost of lunches, coffee shop beverages, and gifts for coworkers are all gone. You’re not making contributions to a retirement account or a Health Savings Account.
Can these cost savings offset your new daily and monthly expenses? Probably not. You’ve got all day to spend money. You’ve got all the time in the world to take trips and attend events. Have you planned for your new, free-time expenses? If not, this may be the biggest financial planning mistake you make.
4. Hoping Social Security and a Pension Will Provide Enough Retirement Income
We’ve already talked about underestimating expenses in retirement. Even if you’ve paid off your mortgage, vehicle loans and credit card debt, you cannot predict cost-of-living increases, escalating property taxes, home and car insurance costs or health care costs. Gas up your car today for $2.30 a gallon. A year from now, the cost could soar. And what about food, clothing and basic utilities?
Social Security income was always intended as a safety net, not a replacement for retirement savings. Your day-to-day retirement income savings will consist of Social Security benefits in part, but also pensions if you’ve earned them, any other investments and your savings. It’s recommended that your retirement income should equal 70—80% of your pre-retirement income for a comfortable retirement.
It may be important to review your retirement plan with a trusted financial advisor soon. You might find better ways to save smarter for your retirement.
5. Assuming the Stock Market Is Too Risky During Retirement
When saving for retirement, the last thing you want is to lose any of your hard-earned dollars in risky investments. A basic understanding of how an investment portfolio can work for you may help alleviate your fears of stock market investments and ultimately lead to increased gains in your retirement portfolio.
First, an investment portfolio is built from a variety of income-bearing options: stocks, bonds and commodities. Your portfolio is built according to your tolerance for risk. When the stock market goes up and down, a balanced, diversified portfolio will likely adjust well to market fluctuations.
Your financial advisor does not invest your funds directly but does help guide you to make informed choices about how to better build your financial retirement fund.
6. Forgetting that Social Security Benefits Can Be Taxed in Retirement
Not everyone is suited to a life of leisure. Many adults, when faced with retirement, are afraid of leaving the workforce. The good news is that you can work as long as you like, are able or your employer allows. Working longer may increase your Social Security benefit. And, being around coworkers will keep you socially active and engaged. Your earnings may help you delay taking Social Security payments, which will increase by 8% a year up to age 70.
However, if you receive Social Security benefits, be mindful of the penalties you may pay up until full retirement age (FRA). Once you reach FRA, working won't affect your Social Security benefits. However, if you claim your benefits before you reach your FRA, your earned income can lower your benefits.
On top of that, many people believe that their Social Security benefits are tax-exempt, but this simply isn't the case for many retirees. In fact, the Social Security Administration estimates that 52% of beneficiaries paid income tax on their benefits in 2015 and 56% of all beneficiary families will owe income tax on their benefits from 2015-2050.
Whether your benefits will be taxed and what percent of your Social Security benefits are taxed depends on your provisional income. That’s why it’s important to make sure you understand all the pros and cons before adding post-retirement work income to your retirement savings plan.
7. Trying to Tackle Retirement Planning on Your Own Because You Don't Know Who to Trust
The internet is a great place to gather information on almost any topic. When it comes down to emotion-driven subjects like your personal finances, you may find that information is often designed to scare you more than help you. Retirement planning should be based on your dreams, not your fears.
A professional financial advisor can help you plan for the retirement you want while accounting for most changes that life may bring. Planning for your retirement, armed with solid information, will help you decide when you can go it alone or when to get help.
Building Trusted Relationships
A trusted financial advisor will help you set realistic goals and steer you away from the many factors that could negatively impact your retirement financial security. Your local Wealth Enhancement Group financial advisor will work with you to be in a better position to benefit from your retirement savings so you can begin to take a more objective look at what you can expect for your retirement.
The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual.
There is no guarantee that a diversified portfolio will enhance overall returns or outperform a non-diversified portfolio. Diversification does not protect against market risk.
